No one hedge fund should have all that leverage.
In a recent Twitter thread, Genesis CEO Michael Moro said that the “large counterparty who failed to meet a margin call” mentioned last month by the institutional crypto broker was the troubled Singapore-based fund Three Arrows Capital (3AC).
“We previously stated in June that we mitigated our losses with respect to a large counterparty who failed to meet a margin call,” said Moro. “Now that the BVI bankruptcy process has commenced, we can confirm that the counterparty was Three Arrows Capital.”
The news comes hot on the heels of a court in the British Virgin Islands ordering 3AC to liquidate its assets. The public nature of this order is in part why Moro is now able to identify who the large counterparty was.
He explained that the collateral used for the loan was “immediately” sold to protect the firm.
4/ Since then, we worked with @DCGco to find the optimal strategy to further isolate the risk. DCG has assumed certain liabilities of Genesis related to this counterparty to ensure we have the capital to operate and scale our business for the long-term.
— Michael Moro (@michaelmoro) July 6, 2022
Much like defaulting on a loan, margin calls occur when investors who are speculating with borrowed money fall below the broker’s maintenance margin. In this case, Moro said that 3AC had a maintenance margin of “weighted average requirement of over 80%,” meaning 3AC needed to maintain this amount of value before having their collateral sold off.
Notably, Moro's parent firm, Digital Currency Group (DCG), also took on some of the losses “to ensure that [Genesis has] the capital to operate” for the foreseeable future.
Decrypt has contacted Genesis to determine how much the loan was worth in dollar figures and to what extent DCG assisted with the firm’s shortfall.
Three Arrows, Genesis and the crypto contagion
This is not the first time that 3AC, founded by Su Zhu and Kyle Davies, has been liquidated.
Following the collapse of Terra’s UST stablecoin and its sister governance token LUNA in May, 3AC has emerged time and again as a major counterparty for several other crypto firms. At that time, it was reported that the fund fielded losses of roughly $200 million, with Davies telling the Wall Street Journal that "the Terra-Luna situation caught us very much off guard."
Once also began tumbling, other trading platforms, including BitMEX, , and Deribit, all announced that they had liquidated 3AC’s positions after the latter failed to meet similar margin calls.
Crypto lending platforms Voyager and BlockFi both suffered large losses after each liquidated 3AC.